The retirement system’s ‘perfect storm’

Published: February 25, 2011

If a $600 million to $900 million gap in the budget sounds daunting, what would you say to almost $5 billion in unfunded pension liability and medical subsidy accounts for New Hampshire's public employee retirement system?Did that get your attention? It also caught the attention of the Pew Center, an independent public policy think tank that, in its report "The Trillion Dollar Gap," gave New Hampshire (and 18 other states) the lowest ranking of three possible public employee retirement system rankings - "serious concerns."That seems to be a bit of an understatement. New Hampshire's public employee retirement system, in the latest annual report available and using the latest actuarial practices available, notes that the account is only 58.5 percent funded, well below the industry-accepted standard of 80 to 85 percent.If you are not a public employee and you wonder why any of this should be your concern, remind yourself that public employers who pay into the system (such as state, county, municipal and school employers) derive revenue from taxpayers, including businesses. In fact, businesses are the largest single contributor to the state's general fund and significant property-tax payers. At current funding levels, taxpayers, including businesses, are contributing more than $300 million per year to the retirement system.So how did we get into this situation and what can we do about it? First, in the early 1990s during another difficult state budget session, an actuarial accounting system was used that understated true costs. It was meant to be temporary, but like many temporary practices, it became permanent. The result was years of employer and employee underpayments, which masked the system's true liability.Then the Great Recession hit and exacerbated an already tough challenge. Pension plans around the country, individual retirement accounts like 401(k)s and 403 (b)s, and New Hampshire's retirement system investments took a beating. Finally, public policy leaders may have been too generous and promised pension plans, cost-of-living increases and medical benefits that now appear to many observers to be too rich to support.When you add these factors together, you get "the perfect storm" - an almost $5 billion perfect storm.Legislative changes made in 2006 have put a more accurate actuarial accounting system in place and investment markets have stabilized and should continue to improve. But more changes are needed, and making them is going to require political leadership and courage. Last year alone, the pension system took in $451 million from employer and employee contributions, but paid out $550 million.The Business and Industry Association, working cooperatively with municipal, county and school employer organizations and House and Senate legislative leaders, is backing a number of reform proposals. These include increasing the retirement age for group II employees (firefighters, police officers and public safety personnel); increasing the number of years on which pensions are calculated from the current highest three years to five years; redefining earnable compensation; and changing the retirement system board representation to more fairly balance the interests of management and labor. We also think it is time for the Legislature to consider moving new employees from the current defined benefit package to a defined contribution plan, similar to what is now common in the private sector.We fully expect these proposals to evolve during the legislative session and other pension reform proposals to surface as well. The BIA will stay closely engaged and carefully consider each proposal. But make no mistake - this is a multibillion-dollar problem that hangs over the head of every taxpayer, including the business community, the job creators in New Hampshire. The time for meaningful reform is now.Jim Roche is president of the Business and Industry Association of New Hampshire.

This article appears in the February 25 2011 issue of New Hampshire Business Review